Economic Policy Review ISSN 1313 - 0544

“Empty their Pockets”

Author: Petar Ganev / 17.05.2010
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Exactly one month ago IME came out with the position, that the proposed “anti-crisis” plan (the one with the 60 measures) will not work and will not cover the hole in the budget. Now it is recognized by the government too, which at once spoke about an increase of the VAT with more than 2 percentage points. With promises like “now we will raise it, and later we will take it down even more” it is expected the idea to be sold to the society as something that is not pleasant, but simply necessary.

In this same position a month ago we stated very clearly, that in this case it is referred to fully budgetary measures. The government put its focus on this to patch the budget, rather than the crisis. It is normal the balanced (or at least not totally shattered) budget to be the major priority of the government, but it shouldn’t leave off all other acts of these measures. It is clear, that if we double the VAT, the budget will be enough, but we can all imagine what the effects on our economy would be. This example comes to show us only one thing – putting together the budget (in any way) has its price, which should be always taken into consideration. Only this way we can evaluate the different alternatives and take the right decision.

The problem, which we attack, is clear to all – in the moment the government is spending more than it can afford. The problem has just two possible solutions – either we reduce the expenditures, or raise the revenues (i.e. taxes). Both solutions have their own price – after each state expenditure (whether the salary of an employee, purchase of a printer or a highway construction) goes into someone’s pocket, and each government revenue comes out of someone’s pocket in one way or another. In this situation there will always be someone dissatisfied, so the right decision here should be based on the economic reason and logic rather than the mood of different society groups.

Considering the size of the hole in the budget, the options are either a serious reduce of state expenditures or increase of the VAT, which is the main revenue source for the budget. The higher VAT has this feature that it actually falls on everybody - workers, students, children, pensioners. Each one of us will pay for more expensive goods, so that we can fill the state treasury to finance the expenditures of the state.

Is it worth? I think not! Here's why:  

Ø      The Bulgarian state spends an enormous sum of money for public healthcare and offers an awful service – the sector is not reformed and refuses to be reformed;

Ø      The Bulgarian state spends an enormous sum of money for public education and science and achieves extremely disappointing results – the higher education and science are unreformed sectors, which refuse to be reformed;

Ø      The Bulgarian state spends an enormous sum of money to play the role of an economic agent – the public companies waste our money and refuse to change;

Ø      The public administration is enormous – it also refuses to be reformed / optimized; 

Ø      The programs of the ministries are budget-funding-orientated rather than achieving results – there are no finished programs, but only started new ones and restructured old ones;  

All these are examples of pointless and ineffective state expenditures in a number of areas, which after all refuse to change. You can not waste other people’s money and feel offended at any criticism. You can not oppose each effort to reform and only want more and more money. Until this is not changed, it doesn’t make sense the people to take the entire burden of the crisis, while the state remains unaffected.

Here is really the key. All blows so far were taken by the people, while the state was even planning to make record-breaking expenditures. Now is the time for the state to assume its burden – decreasing the state expenditures and reforms. VAT should not be increased. Cutting off the expenditures is the true and at the same time anti-crisis measure.

In the spirit of all said so far is the statement of the economic minister Traicho Traikov on BNT this morning: “The increase in taxes is a way to drive in more money, it is not a way to stimulate the economy”; All the tough-looking reforms must be done… if hospitals have to be closed, close hospitals. If something has to go bankrupt, let it bankrupt”; You can’t put everybody at stake and empty their pockets”. Well done, hopefully, these words will be heard.


The article is part of the IME campaign “State Expenditures in Bulgaria”.